Question

Assume the standard deviation of stock A is 10% and the standard deviation of stock B is 50%. You have bought $10,000 worth of stock A and $30,000 worth of stock B. If the correlation coefficient between the two stocks is -0.20 (negative!), what is the standard deviation of this two-stock portfolio?

		a) 34.8%
		b) 35.8%
		c) 36.3%
		d) 37.1%
		e) 37.5%

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

C D E Standard deviation Stock A Stock B Investment $10,000 $30,000 $40,000 Weight 0.25 0.75 10% 50% Correlation (A&B) -0.20 Standard deviation of Portfolio 37.1%

Cell reference -

120 А в I L Investment Weight Standard deviation | Stock A Stock B 10000 30000 =SUM(C3:04) =C3/$C$5 =C4/$C$ 5 0.1 .5 0 Correlation (A&B) -0.2 Standard deviation of Portfolio =SQRT((D3*E3)^2+(D4*E4)^2+2*D3*D4*E3*E4*07) | 11

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.